£50bn move to unlock mortgage market

The Bank of England is preparing to unveil a plan to inject £50bn of funds into the financial system next week in an attempt to breathe life into the moribund mortgage market, it was reported last night.

The scheme, which the Bank of England has been working on for more than six weeks, follows pleas by mortgage lenders to help unfreeze money markets paralysed by the credit crunch.

Under the scheme, the government is expected to issue bonds which lenders will be able to exchange for packages of mortgages lodged with the Bank as collateral.

According to the BBC, the government bonds could have a maturity of one year but the lenders will be able to roll them over for three years, providing them with the long-term finance they have been calling for. The one-year maturity will mean the bonds will not have to be added to the government's national debt.

The £50bn may not be as much as the lenders were hoping for, as it is just half of the £100bn of new home loans granted each year and even smaller in comparison to the outstanding mortgage market of about £300bn.

Lenders have cautioned that even if the Bank does proceed with the plan to use mortgages as collateral, it is unlikely to mark a return to the situation a year ago when the mortgage market was characterised by cut-throat competition among lenders.

The lenders are due to meet Alistair Darling, the chancellor, and housing minister Caroline Flint on Tuesday in an attempt to hammer out ways to keep the housing market afloat following the meeting between top bankers with the prime minister in Downing Street last week.

Figures out yesterday showed a further weakening of the housing market. The Council of Mortgage Lenders reported that gross mortgage lending fell at a substantially increased rate of 17.1% year-on-year to £26bn in March, and was down 8% year-on-year in the first quarter of 2008.

The property website Rightmove, meanwhile, revealed that prices were falling in 27 out of the capital's 32 boroughs. It said prices fell by 0.9% from March to April to an average of £403,545 - the worst April figure in the six years since it began its survey. However, that still left the average 6.2% higher than it was a year ago.

Rightmove said the most expensive boroughs had been the hardest hit and were showing the fastest slowdown in annual gains. The group's nationwide survey, due out on Monday, is likely to show a monthly drop in prices across the country.

Miles Shipside, commercial director of Rightmove, said: "It is highly unusual to see a fall in April. Spring is traditionally the peak season for new sellers to launch their properties on to the market at more optimistic prices, as gardens are looking their best and time is on a seller's side.

The borough of Richmond, in south-west London, was the top faller this month, down 2.7%, dragging the annual rate of increase down to 7.6% from 32.7% a year ago. The most expensive borough, Kensington and Chelsea, had an average asking price of nearly £1.5m, down 2.2% on the month.